RBI hops between spot, forward for a stable Re

TNNAug 20, 2008, 03.20am IST

MUMBAI: At a time when demand for dollars is outstripping supply, the Reserve Bank of India (RBI) is facing a daunting task. The central bank is juggling between the spot and forward markets to prevent the rupee from slipping without drying up its supplies.

By adopting a combination of spot and forward transaction, the central bank is attempting to smoothen its forex market operations and avoid volatility or steep movements in the currency.

When RBI sells dollars in the spot market to support the rupee, it ends up sucking out rupees. However, in the forward market, currencies are bought and sold at a pre-determined rate without taking physical delivery for an agreed period. The delivery is generally on the date when the contract matures. This prevents supplies from hitting the spot market and helps manage the value of the currency as also the cash condition in the market.

RBI has been tactfully managing the reserves and exchange rates on one hand and the rupee liquidity in the domestic markets on the other.

There has been consistent dollar intervention, both in the spot and forward currency markets, for several months now. According to the latest RBI data, outstanding net forward purchases by RBI rose from $4,900 million in October 2007 to $13,700 million in June 2008.

RBI was a net seller of $756 million in the current fiscal year up to June 2008 against net purchases of $78 billion in 2007-08. RBI is also unwinding substantially in the forward market of late. For instance, cumulative net forward purchases were higher at $17,095 million in April.

A senior foreign exchange strategist with a multinational bank said: "RBI has been selling dollars in the spot market and was buying them in the forward market at the beginning of 2008."

RBI may infuse Re to ease cash flows

The rupee was then quoting at 39-39.50-levels against the dollar. The central bank had then entered into forward agreements across all maturities and a part of these contracts have in fact already matured." In a situation where cash flows are tight, the central bank is also likely to get into swap deals so that it buys dollars and infuse rupee funds into the forex market, he added.

Offshore players, typically portfolio investors or FIIs, are also on the demand side and not selling dollars. The supply, on the other hand, is coming from exporters who are selling dollars, but in the forward market. RBI is known to track the real effective exchange rate (REER), which shows the rupee to be overvalued. This is largely due to a strong dollar in global currency markets. This could also prompt the central bank to stay off the local market and let the rupee weaken versus the dollar.

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According to Standard Chartered Bank's head-forex and derivatives trading, Agam Gupta: "The forward currency market is always neutral to cash conditions in the spot rupee market. RBI has already made significant dollar purchases in the forward market earlier this year. Hence, the central bank may choose to sell these dollars now, which will help offset the earlier purchases. This will also not cause any depletion in RBI's forex reserves. On the other hand, RBI is also hinting that it may not particularly protect any dollar-rupee levels, but may intervene in the forex market to ensure smooth movement in exchange rates."